Tag Archives: Michael Lewis

Shane Battier And The Principal-Agent Problem

Moneyball for basketball through the prism of Shane Battier. Classic Michael Lewis

There is a tension, peculiar to basketball, between the interests of the team and the interests of the individual. The game continually tempts the people who play it to do things that are not in the interest of the group. On the baseball field, it would be hard for a player to sacrifice his team’s interest for his own. Baseball is an individual sport masquerading as a team one: by doing what’s best for himself, the player nearly always also does what is best for his team. “There is no way to selfishly get across home plate,” as Morey puts it. “If instead of there being a lineup, I could muscle my way to the plate and hit every single time and damage the efficiency of the team — that would be the analogy.Manny Ramirez can’t take at-bats away from David Ortiz. We had a point guard in Boston who refused to pass the ball to a certain guy.”

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Letter to a Young iBanker

As is my wont around here, I come back to Michael Lewis.  This time he gives advice to all those young ibankers hanging onto the cubicle flotillas at recently detonated bulge bracket banks.  It’s career advice, but it just as well might apply to anyone working in anything they do not find fulfilling. 

What Wall Street did so well, for so long, was to give people jobs that they could pass off to themselves as well as others as callings. Such was their exalted social and financial status: Wall Street jobs made people feel special without actually having to be special. You never really had to explain why you were doing it — even if you should have.     But really, the same rule that applies to properly functioning financial markets applies to other markets: There’s a direct relationship between risk and reward. A fantastically rewarding career usually requires you to take fantastic risks. To get your seat at the table on Wall Street you may have passed through a fine filter, but you took no real risk. You were just being paid, briefly, as if you had.     So which is it: job or calling? You can answer the question directly, or allow time to answer it for you. Either way, I think you’d be happier if you stopped thinking of what the world had to offer you, and started thinking a bit more about what you had to offer the world. Real excitement isn’t just in whatever you happen to be doing, but in what you bring to it.

It’s interesting he uses the term “calling.”  Max Weber was the first to link up the Protestant idea of a calling given to you by god with the spirit of capitalism.  That and the work ethic, of course.  I can’t think of anyone who analyzes capitalism in that way anymore.  It’s a little too Apollonian for my taste. But it’ll be interesting to see how this return to fundamentals works out.

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Paulson Yells Mulligan On Bailout

 

Paulson yells mulligan to Congress.

Paulson yells mulligan to Congress.

The New York Times demands a two stroke penalty on TARP (The Act Rewarding Plutocrats). Gretchen Morgenson reports

While the government still declines to say exactly how it has spent your funds, or who all the beneficiaries are, Mr. Paulson conceded that his huge capital injection hasn’t persuaded banks to lend more money.

Michael Lewis has some more tips before Paulson tees off on the next round of disbursement. 

  1. Embrace rent-seeking. The main qualification for assistance is past incompetence. Instead, give the bailout money to friends, family and struggling authors. So they’re not bankers, you protest. But they haven’t yet been given a chance to prove their financial idiocy. Once they fail, they’ll then have just as much experience as current bankers. GM, Ford and Chrysler have completely mis-framed their appeal for a bailout. Who says they have to make cars? Why not turn the big three into the big lending tree? 
  2. At least give the money away to people who won’t present themselves as obstacles to innovation. Sez Lewis, “By giving money to bankers who have made many stupid loans you have made life harder for bankers who have never made stupid loans. By aiding the dumb banks you prevent the smart ones from replacing them.”

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Michael Lewis Out Scoops Them All

Michael Lewis has a must read article on the implosion of finance. He calls it the end of wall street. It’s an article so clear in its import that, upon reading it, the left wing Lepermessiah at the DailyKos writes

Congress and/or Obama must stop these people from looting the treasury. The Bailout is the biggest bank heist in human history. It must be stopped.

Of course, telling a lefty to close the state coffers once they’ve been opened is like telling a rioter heisting a television to return that property to its rightful owner.  Not gonna happen. And who are you to blow whistles at a party? Anyway, underlying all the layers of dogshit–the BBB rated subprimes, the CDOs built on them, the bond rating agencies that gave CDOs USDA approval, Freddie, Fannie, Marx, Ayn Rand, and L. Ron Hubbard–Michael Lewis identifies the seed of destruction as the principal-agent problem. Once investment banks went public, transferring responsibility for loses from a relatively small group of well-informed owners to a much larger and therefore diffuse set of shareholders, the long-term consequences of managing risk poorly became nil for the suits running the investment banks. (Those long term consequences become even more remote if you can count on the time-servers in government to bail you out.) But what’s particularly electrifying about Lewis’s article is that the principal agent problem leads him back to his old nemesis from Liar’s Poker, John Gutfreund, former CEO of Solomon Brothers. Lewis invites the old adversary to lunch and delivers this wonderful scene for us: 

No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.’s. I doubt any partnership would have sought to game the rating agencies or leap into bed with loan sharks or even allow mezzanine C.D.O.’s to be sold to its customers. The hoped-for short-term gain would not have justified the long-term hit. 

No partnership, for that matter, would have hired me or anyone remotely like me. Was there ever any correlation between the ability to get in and out of Princeton and a talent for taking financial risk? 

Now I asked Gutfreund about his biggest decision. [to go public] “Yes,” he said. “They—the heads of the other Wall Street firms—all said what an awful thing it was to go public and how could you do such a thing. But when the temptation arose, they all gave in to it.” He agreed that the main effect of turning a partnership into a corporation was to transfer the financial risk to the shareholders. “When things go wrong, it’s their problem,” he said—and obviously not theirs alone. When a Wall Street investment bank screwed up badly enough, its risks became the problem of the U.S. government. “It’s laissez-faire until you get in deep shit,” he said, with a half chuckle. He was out of the game….

“No,” he said, “I think we can agree about this: Your fucking book [Liar’s Poker] destroyed my career, and it made yours.” With that, the former king of a former Wall Street lifted the plate that held his appetizer and asked sweetly, “Would you like a deviled egg?”

As they say, read the whole thing. It’s a tale full of idiots and the geniuses who benefited from their stupidity. 

But oh yeah, one more thing. The illustrious journal Nature will soon publish this article by Jean-Philippe Bouchaud in which he states: 

Surprisingly, classical economics has no framework through which to understand ‘wild’ markets…We need to break away from classical economics and develop completely different tools.

Someone should make that Frenchman elucidate how Lewis, using concepts at home in the reigning paradigm in economics, is wrong in his diagnosis.

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Michael Lewis At It Again

In his latest column, his wit shines once more: 

If you haven’t figured it out by now, America has hired the wrong Paulson. There are two of them, Hank and John. Hank turned Goldman Sachs from an investment bank into a busload of tourists going to a casino, with borrowed money.

Goldman might have been the smartest investment bank but you only needed to see Dick Fuld testify before a congressional committee to know how much that means. No pun intended, but Dick didn’t know dick.

Astute observers will note that every time they run across a party of midgets, one is tallest, and his name is usually Goldman. Suffice it to say that while Hank’s shop was creating subprime mortgage-backed bonds, John’s was shorting them. Hank wound up working for the government, John wound up making $3.7 billion. For himself.

Wake up America! The teacher has just asked the class to send one member to the chalk board to figure out a problem. You just reached past the A student in the front row and plucked the guy in the middle who’s working hard for a B-minus. And he’s confused!

Lewis also alerts me to this beauty of a letter written by Andrew Lahde. After running the table this year shorting banks–his hedge fund reports earnings over 800 percent–Lahde decided to retire in his prime. The best excerpt of his resignation letter

 I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

Or as Arnold Kling would put it, it sounds like some geeks made some money off the suits.

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Attorney Generalissimo Cuomo to Einhorn: You Know Too Much!

Our man of the hour, David Einhorn, has said academic research and his firm’s experience indicate that whenever management complains about short-selling, it is a sign that management is attempting to distract investors from serious problems. Einhorn said that back in May. I would like to add a corollary to Einhorn’s principle: whenever management convinces regulators and attorney generals that short-selling is a problem, it is a sign that entrenched interests are using the state to protect their firms from the gales of creative destruction. 

Today’s story begins with John Mack of Morgan Stanley working in concert with Lloyd Blankfein of Goldman Sachs to persuade numerous federal officials to ban the short-selling of stocks. Much to their delight, I am sure, Andrew Cuomo entered from stage right, announcing he is opening “a wide-ranging investigation into short selling in the financial market.” (These New York Attorney Generals sure know how to wag a finger!) Unsurprisingly, the attorney general’s logic is impeccable: “Short selling is not illegal,” he says, “but when combined with the spread of wrong information, that is illegal.” So without offering so much as a hint as to what false information has been circulating throughout the markets–the implication of his quote is that the downfall of Lehman was unjustified, since it was based on false information–Attorney Generalissimo Cuomo deftly concludes, “I believe the SEC should freeze short selling of financial stocks on a temporary basis.”

But the problem isn’t that false information is putting undue downward pressure on the price of stocks in the banking industry. The problem is that the information available is damning. Lehman deserved to fail, short-selling of their stock notwithstanding. In fact, short-sellers like Einhorn provide a valuable service, first by trading on this information, but secondly, and most importantly in Einhorn’s case, by making this information public. So what are we to conclude from Mack’s statements? (Other than that he has some influence in the attorney general’s office?)

Michael Lewis raises a good point here. He says one positive upshot of the Lehman collapse is that we’ll finally get to see inside a big Wall Street firm. With Lehman, he writes:

 We’ve just witnessed the largest bankruptcy in U.S. history and we know neither the inciting incident (though there is speculation that sovereign wealth funds decided to stop lending to Lehman Brothers Holdings Inc.), nor the deep cause. But there’s now a pile of assets and liabilities smoldering in New York awaiting inspection.

The assets include subprime mortgage-backed bonds and no doubt many other things that aren’t worth as much as Lehman hoped they might be worth. But it’s the liabilities that are most intriguing, as they include more than $700 billion in notional derivatives contracts. Some of that is insurance sold by Lehman, against the risk of other companies defaulting.

Natural Question

The entire pile might be benign, but somehow I doubt it. We may well find out that Lehman Brothers, in liquidation, has a negative value of hundreds of billions of dollars. In that case the natural question will be: How much better could things be inside Morgan Stanley and Goldman Sachs, both of which were engaged in the same lines of business?

If things are only marginally better for Morgan or Goldman, then investors need to know. They also ought to be allowed to trade on that information. If some bureaucratic time-server manages to forbid short-selling, then contrary to Cuomo’s assertion, they wouldn’t be preventing irrational selling on false information. Oh no, good citizens–they would be preventing you from trading upon the truth.

See also Robin Hanson here. And Michael Lewis again.

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